Friday, 13 December 2013

SHAKEELA BANU MBA

GLOBAL ECONOMIC CRISIS

The global economic crisis is
commonly believed to have begun in July 2007 with the credit crunch, when a
loss of confidence by US investors in the value of sub-prime mortgages caused a
liquidity crisis. This, in turn, resulted in the US federal bank injecting a
large amount of capital into financial market. By September 2008, the crisis
had worsened. As stock markets around the globe crashed and became highly
volatile.

According to one influential school
of thought, Paul krugman, there were global imbalances, the phenomenon of huge
current account surpluses in china and few other countries co-existed with the
unsustainable large deficits in the US. The imbalance was caused by the
propensity of the countries with high savings rate to pack their savings often
at low yields, in the U.S. The flood of money from these countries into the
U.S. kept interest rates low, fuelled the credit boom and inflated real estate
and other asset prices to unsustainable levels.

It all began with American dream,
that every American should have a home. Regardless of who you are and what you
do, if you are an American, you should have something called a home. Real
estate business was in a boom, financial agents thought that there wasn’t a
better time to give away loans. The house hold sector was given a boost with
increased monetary supply by commercial financial companies, and people were
given loans regardless of the credit rating they received. . There was easy
availability of credit at low interest rates. The boom in housing sector made
both banks and home buying believe that the price of a real estate would keep
going up. Banks went out of their way to lend to sub-prime borrowers who had no
collateral assets. All this was fine as long as housing prices were rising but
the housing bubble burst in 2007. Home prices fell between 20% and 35% from
their peak, mortgage rates also rose. Sub-prime barrowersstarted defaulting in large numbers; the banks had to
report huge loses.

Sub-Prime
Mortgage

The
practice of lending money to people with weak or limited credit history is
called Sub-Prime Lending. A mortgage is simply a loan on a house, and a
mortgage rate is the interest rate on such a loan.

Sub-Prime
lending covers different types of credit including mortgages, Auto-loans and
credit cards. Since subprime borrowers often have poor or limited credit
histories, they are typically perceived as riskier than prime borrowers.

Sub-Prime
lending became popular in the US in mid-1990‟s, with outstanding debt
increasing from 33$ billion in 1993 to $ 332 billion in 2003. December 2007,
there was an estimated $ 1.3 trillion in sub-Prime mortgage outstanding. This
substantial increasing in attributable to industry enthusiasm; banks and other
lenders discovered that they could make hefty profits from origination fees,
bundling mortgages into securities, and selling these securities to investors.
Banks and lenders believe that the ricks of sub-prime loans could be managed, a
belief of raising home prices and the perceived stability of mortgage backed
securities. But rising home prices was only for a brief period, there was a
gradual decline of home prices leading to heavy losses.

Home
values declined, many barrowers realized that the value of their home was
exceeded by the amount they owed on there mortgage. Borrowers began to default
on their loans, which drove home prices down further and ruined the value of
mortgage backed securities.

Great depression and Global Economic Crisis

The
stock market crash on October 29 1929 set in motion a series of events that led
to the great depression, but in fact, the American economy and global economy
had been in turmoil six months to black Tuesday and a variety of factors before
and after that fateful date in October caused the great depression. October 29,
1929 is often marked as the start of the great depression in America, a dark
day when the US stock market crashed. Over a two day period, the market lost
24% of its value.

The
great depression was a global economic crisis that may have been triggered by
political decision or by speculation.

The stock market collapse of 1929 worldwide
there was-

·Increased unemployment.

·Fall in Government revenue.

·Drop in international trade.

·More than a quarter of the US labor force was unemployed.

Global
Economic Crisis has been unprecedented since the great depression of 1929-32.
The less developed countries have been severely affected. Although they are not
a homogeneous group, they share some common characteristics which render them
extremely vulnerable to external shocks. The commodity boom of 2003-08 allowed
most of the less developed countries to increase the national saving and
investment and to accelerate the growth of their gross domestic product. The
subsequent “bust” has had serious detrimental impact not only on their current
levels of economic activity and employment, but also on their longer term
prospects for industrialization and development. The Global Economic Crisis is
a wakeup call for less developed countries to reconsider their long term industrialization
and development strategies. International assistance as well as reforms of
policies of international organizations and donors is required. In the short
term the space available to less developed countries for counter cyclical
policies in response to the crises is very high.

Indian
economy is being affected by the spillover effects of the global economic
crisis, stock market was badly hit, industrial sector and IT sector was
affected due to financial collapse of the US market.

References

1. Chidambaram .P 2008 spill- over effects of global crisis will be tackled. The Hindu, daily, November
19, 2008.